Each alternative involves an initial outlay of $100,000. Their cash flows follow
ID: 2759342 • Letter: E
Question
Each alternative involves an initial outlay of $100,000. Their cash flows follow:
Year
A
B
C
D
1
10,000
50,000
25,000
-
2
20,000
40,000
25,000
-
3
30,000
30,000
25,000
45,000
4
40,000
-
25,000
55,000
5
50,000
-
25,000
60,000
Evaluate and calculate and rank each alternative based on net present value (use a 10% discount rate).
A
B
C
D
NPV
Year
A
B
C
D
1
10,000
50,000
25,000
-
2
20,000
40,000
25,000
-
3
30,000
30,000
25,000
45,000
4
40,000
-
25,000
55,000
5
50,000
-
25,000
60,000
Explanation / Answer
caculation of NPV = initial year is outflow so it is subtracted and all other 5years are inflow so they are added by multiply with their respective PV factor at the rate of 10%. for all the alternatives we multiply outflow with 1 because in zero year PV factor is 1
HERE calculate NPV for A = - $100,000*1( because it is outflow as we said above) + 10000*1/1.10 + 20000*1/1.10*1.1 +30000*1/1.10*1.10*1.10 +40000*1/1.10*1.10*1.10*1.10 + 50000*1/1.10*1.10*1.10*1.10*1.10
NPV = -100000+9090+16520+22530+27320+31050 =$ 6510
NPV of B = -$100000*1 +50000*1/1.10 +40000*1/1.10*1.10 +30000*1/1.10*1.10*1.10
NPV = -100000+45450+33040+22530 = $1020
NPV of C = -$100000 *1 +25000*3.791 (it is annuity factor of 10% for 5 years)
here inflow for all the years is same so we take annuity factor for 5 years of 10% i.e3.791
NPV = -100000+94775 = -$5225 negative NPV
NPV of D = -$100000*1 + 45000*1/1.10*1.10*1.10 + 55000*1/1.10*1.10*1.10*1.10 + 60000*1/1.10*1.10*1.10*1.10*1.10
NPV = -100000+33795+37565+37260 = $8620
NPV OF D is highest so it is ranked 1st
NPV OF A is 2nd highest so it is ranked 2nd
NPV of B is ranked 3rd
NPV of C is negative so it is ranked 4th
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